INVESTOR PRICING SURVEY
Optimism continues to grow for respondents to the Colliers International/Real Estate Capital Investor Pricing Survey, their 2013 total return expectation jumping from 6.25% in July to 9% this time.
Their 2014 forecast is also more bullish, up from 7.7% to 9.2%. Suddenly everyone wants to buy South East offices – 85% of investors rated them a buy. There are more buyers, few sellers, and interest is spreading to the regions, with secondary office yields down 70 basis points.
The survey, in its 20th year, by Dr Karen Sieracki of KASPAR Associates, analyses the property investment community’s views, providing analysis of the industry’s capital and rental growth expectations.
Investment intentions: many more buyers
Investors are looking outside Central London and the South East. The office and industrial sectors are most popular, with selected interest in retail. Respondents wanting to buy South East offices jumped from 67% in the July survey to 85% this time.
The share targeting central London offices fell, from 75% last time to 62%, while there are now 20% more potential buyers for North West offices, at 62%, up from 42% in July. Industrial was favoured in all regions, but the South East and West Midlands were the most popular, cited by 69%, while 54% favour the South West, up from 42% in July, and Yorkshire and Humberside.
For retail, 77% and 54% preferred the South East and central London respectively. The retail sector had most sellers across the regions, averaging 31%, except the South East and Central London, which were mainly seen as a ‘buy’. For office sales, respondents mostly favoured Wales, the North East, and Yorkshire and Humberside, at 31%. Interest in selling industrial assets was very limited.
Prime yields were stable at 6.2%, with only a 4bps average outward movement, following 20bps and 10bps compression respectively in July and March. The biggest fall was 50bps for prime business parks, with offices, shops and shopping centres unchanged (see chart).
September’s IPD UK monthly all-property initial yield was 6.25%, down from 6.4% in May, the latest IPD figure at the time of the July survey. There was an aggregate average rise of 40bps for secondary yields, but secondary office yields fell 70bps and secondary business parks yields by 20bps. Yields were up in all other sectors, by 50bps for secondary shops and retail warehouses.
The average all-sector secondary yield was 8.8%, down from 8.9% in July. The highest secondary yield was 9.5% for business parks and industrial assets, then 9.0% for shopping centres; the lowest secondary yield was 8.3% for retail warehouses. Sieracki says: “Secondary offices benefited most from yield compression as investors moved up the risk curve in stock and location as central London became too expensive.”
The gap between prime and secondary yields closed by 5bps, but this masks wide variations. The office prime/secondary yield gap closed 75bps as secondary office yields fell. The yield gap for distribution also narrowed by 42bps, but this was due to prime yields rising. For shops and retail warehouses, the gap increased by 44bps and 27bps respectively as secondary yields rose. Shops had the largest prime/secondary yield gap, at 317bps. All prime/secondary yield gaps were above their long-term average, as has been the case since March 2011.
Respondents’ views on prime pricing were more subtle than in previous surveys. Prime offices were seen as fair value, but becoming underpriced in 2014 and 2015 if initial yield, rental and capital growth forecasts remain constant. Prime business parks are seen as overpriced now and in 2014, but set to become fair value in 2015. Both prime industrial and distribution assets are seen as underpriced.
Respondents said all secondary assets were underpriced except shops and shopping centres. The former was seen as overpriced, but set to became fair value in 2014 and then underpriced in 2015. Secondary shopping centres were seen as overpriced but set to become underpriced in 2014 and 2015.
Rental growth expectations for 2013 improved by an average 76bps, to 0.5%, compared with a 10bps rise in July. The biggest improvement was 190bps for business parks, then 170bps for offices. The only sector where expectations fell was retail warehouses, by 30bps. The highest rental growth prediction was still for offices, at 3.0%. Shopping centre expectations remained negative, at -0.8% (see table).
Rental growth forecasts turned positive across the board in 2014, with a 39bps average improvement to 1.5%. Again, the biggest rise, of 170bps, was for offices, while the only fall in expectations was for retail warehouses. The highest rental growth prediction, of 3.6%, was for offices, then business parks, at 1.4%. The worst prediction was for shopping centres.
Rental growth was expected in all sectors in 2015, averaging 1.8%. Again, offices are tipped for the highest rental growth, of 3.7%, followed by retail warehouses at 1.7%. The relative change from 2014 to 2015 was less than for 2013 to 2014, as rental growth in 2015 was tipped to be only 29bps better. The biggest beneficiaries were shopping centres at 60bps, then shops and industrial at 50bps each.
Capital growth expectations for 2013, negative across the board in March, are now positive for all sectors. The average improvement is 147bps and average capital growth is expected to be 2.0%, up from 0.4% in July. The biggest upgrade was 310bps for offices, then 240bps for distribution. The smallest upgrade was 40bps for shopping centres.
Offices were tipped for the highest capital growth, at 4.7%, then distribution at 2.8%, with the lowest for shopping centres at 0.5%.
Expectations for 2014 capital growth rose 76bps since July. The biggest rise was again for offices, at 170bps, followed by 80bps each for business parks, shops and industrial. The smallest positive adjustment was 20bps for retail warehouses. The average all-sector capital growth prediction was 2.6%, up from 1.8% in July. Respondents then expect capital growth to ease back to 1.9% in 2015.
Total return expectations for 2013 jumped to 9.0%, from 6.25% in July. The 2014 total return expectation also rose, by 150bps to 9.2%, from 7.7% in July and 7.6% in March. Growth has become more ‘front-loaded’, with returns now expected to dip in 2015, to 8.1%. Some 46% of respondents said the big improvement in yields was driving performance, while 31% cited the UK recovery.
Five-year recovery tipped
Some 54% of respondents said the UK real estate recovery would last three to five years; 31% said just two; and 15% five to 10 years.
Respondents felt that assuming no external calamities, UK property would see modest growth, driven by a strong UK economy; overseas investors’ interest in London would continue; and interest in the UK regions would rise. A few said that recovery will end when quantitative easing tapers off and the revival in prime assets is exhausted.
Asked about The Bank of England’s forward guidance, 69% said its introduction had no impact on their investment strategy. On the issue of debt, 69% felt margins were falling, it was easier to borrow and new lenders were here to stay. But some felt debt was not there for weak product and it would not revert back to previous levels.
Among the issues cited for 2014, 31% felt rising interest rates and bond yields would increase prime property’s risk, while others cited difficulty in finding value; shortage of quality stock; secondary asset pricing; allocation to non-mainstream sectors; and the degree of yield impact on capital values.